Saxo Bank head of forex strategy John Hardy wonders how much of a surprise the Federal Reserve can deliver today given high expectations.
Article / 29 July 2016 at 5:00 GMT

3 Numbers: US growth in Q2 looks promising, but can it be sustained?

Blogger / MoreLiver's Daily
  • Eurozone inflation is stuck close to zero – that's an ECB failure
  • Euro area growth is in a slump, which makes another rescue possible
  • US growth picked up in Q2, but will it last long enough for the Fed to hike?
  • EBA bank stress tests results will be announced after European markets close

By Juhani Huopainen

Today’s data calendar has plenty to offer. Euro area’s flash inflation data and the first estimate of the GDP growth rate in the second quarter for both the Eurozone and the US are the most important releases.

Also Britain's monetary aggregates for June are interesting, because of the Brexit referendum.

There are two big events today. The first is the policy meeting of the Bank of Japan and how investors react to it today. As yen crosses tend to move hand-in-hand with the stock markets (a weaker yen is good for stocks), this could dominate the beginning of the European trading session.

 Eurozone central: Growth is strong in Germany, but in Europe it is unevenly distributed,
and banking and fiscal trouble tends to surface in regions of low growth. Photo: iStock

The second event is the European Banking Authority’s results of its latest stress test of select European banks. The results will be announced after the European markets have closed.

Euro area July Flash Consumer Price Index (0900 GMT). The flash estimate of July’s Harmonized Index of Consumer Prices is expected to show an increase of 0.1% from year ago, just as it did in June.

Core prices have been more resilient and have increased by 0.9% from year ago, but the European Central Bank’s failure to reach its inflation target is obvious.

EZ inflaycion
 Chart source: Saxo Bank

Eurozone Q2 Flash Gross Domestic Production (0900 GMT). Euro area’s economy grew 0.6% in the first quarter (1.7% from year ago), and it is expected to have grown 0.3% in the second quarter (compared with 1.5% a year ago).

The joy of beating the US growth rate was thus shortlived, and the euro area is seemingly again returning to a slump. The uncertainty ahead of the Brexit referendum, and the unresolved euro crisis, especially relating to banks, Greece and elections in Spain limited activity.

 Chart source: Saxo Bank

After the UK’s referendum and the recent collapse in the inflation outlook, it seems that after the summer holidays the ECB will have to step in with a very dovish forward guidance, or even announce that the current sovereign bond purchase program will be continued after the current deadline of March 2017.

The recent purchasing manager indices suggest the euro area’s outlook following the Brexit referendum did not deteriorate by much. Unfortunately, at times of low growth, even a small negative is enough to shift the outlook from carefully optimistic to certainly pessimistic.

Add the fear of further terrorist attacks, trouble with the banks and the political spillovers from many sources ahead of the key French and German elections, the outlook is not too rosy.
Much of this was suggested by the ECB’s president Mario Draghi during his latest press conference – bank stock prices have an effect on bank lending.

Thus, the recent weakness of bank stocks is a bit worrying. It also hinders cleaning up the non-performing loans from the banks’ balance sheets and makes recapitalisation of the banks harder.

Some point at the euro area’s growth rate and think that it is tolerable. It isn’t, because growth is unevenly distributed, and banking and fiscal trouble tends to surface in regions of low growth.

The growth is too uneven, and unless there is an European-wide mechanism for balancing the growth between the regions, the euro area’s growth rate would have to be much stronger in order for the weaker regions to enjoy nominal growth.

In my view, the euro crisis is far from solved.

US Advance estimate Q2 Gross Domestic Production (1230 GMT). During the first quarter of the year the economy grew at 1.1% annualised pace, but growth is expected to have improved notably in the second quarter.

According to the median forecast, the US is expected to have grown 2.6% in the second quarter.

That would be above the 2% average seen during the current recovery, but following the three below-average quarters, it would not necessarily be a trend reversal, but rather a return to the mean.

Unfortunately, better monthly data is not necessarily good for the GDP – a strong USD and higher consumer spending could have increased imports and decreased exports, which would decrease the GDP. Also inventories are a big moving element.

The Atlanta Federal Reserve’s GDPNow model gave a nasty surprise yesterday, as the updated final forecast of the second quarter’s growth rate was lowered from 2.3% to 1.8% because of advance data on inventories and foreign trade.

Today’s release could disappoint and come in way below the consensus forecast.


Chart source: Atlanta Fed

The stronger growth in the second quarter is more or less old news now. The key question is whether the strength of the economy will carry over to the rest of the year or not.

If it does, the Fed's consensus view of more rate hikes in 2016 would become true. There are now, however, added worries, especially from Europe.

Also, the US presidential elections and possible market volatility because of Trump's surprisingly strong performance is still ahead of us. Maybe the Fed can manage to do one more rate hike in 2016, but not two.

EURUSD has been rallying a bit during the past couple of days. It seems partly technical - the pair did not want to test the previous low around 1.0950, and rallied close to the previous high above 1.1100.

I noticed that the past high was lower than the previous high, and believe the pair has now already visited the range's top and is ready for a re-test of the lows. EURUSD is probably on its way lower to 1.1000, or slightly below that.

EURUSD weekly chart

EURUSD hourly
Chart source: Saxo Trader - create your own charts with SaxoTrader. Click here to learn more 

-- Edited by Adam Courtenay

Juhani Huopainen is a blogger and a macro analyst at More Liver’s Daily. Follow Juhani or post your comment below to engage with Saxo Bank's social trading platform.

Lilith Lilith
US growth has been corrected to 2.5% from 2.6% ... we might be looking at any figure from 2.0% till 2.5%... If it can be guessed from FED's talk, it is probably the higher end.
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